Question:
SETTING STANDARDS, ETHICAL BEHAVIOR Quincy Farms is a producer of items made from farm products that are distributed to supermarkets. For many years, Quincy's products have had strong regional sales on the basis of brand recognition. However, other companies have been marketing similar products in the area, and price competition has become increasingly important. Doug Gilbert, the company's controller, is planning to implement a standard costing system for Quincy and has gathered considerable information from his coworkers on production and direct materials requirements for Quincy's products. Doug believes that the use of standard costing will allow Quincy to improve cost control and make better operating decisions.
Quincy's most popular product is strawberry jam. The jam is produced in 10-gallon batches, and each batch requires six quarts of good strawberries. The fresh strawberries are sorted by hand before entering the production process. Because of imperfections in the strawberries and spoilage, one quart of strawberries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time required for sorting strawberries in order to obtain one quart of strawberries. The acceptable strawberries are then processed with the other ingredients: processing requires 12 minutes of direct labor time per batch. After processing, the jam is packaged in quart containers.
Doug has gathered the following information from Joe Adams, Quincy's cost accountant, relative to processing the strawberry jam.
a. Quincy purchases strawberries at a cost of $0.80 per quart. All other ingredients cost a total of $0.45 per gallon.
b. Direct labor is paid at the rate of $9.00 per hour.
c. The total cost of direct material and direct labor required to package the jam is $0.38 per quart.
Joe has a friend who owns a strawberry farm that has been losing money in recent years. Because of good crops, there has been an oversupply of strawberries, and prices have dropped to $0.50 per quart. Joe has arranged for Quincy to purchase strawberries from his friend's farm in hopes that the $0.80 per quart will put his friend's farm in the black.
Required:
1. Discuss which coworkers Doug probably consulted to set standards. What factors should Doug consider in establishing the standards for direct materials and direct labor?
2. Develop the standard cost sheet for the prime costs of a 10-gallon batch of strawberry jam.
3. Citing the specific standards of the IMA code of ethics described in Chapter 1, explain why Joe's behavior regarding the cost information provided to Doug is unethical.